Glenmark_Initiating Coverage

8/14/2019 Glenmark_Initiating Coverage

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ICICIdirect.com|Equity Research

xhibit 1:Key Financials (Rs Crore)ar to March 31 FY08 FY09 FY10E FY11E

Net Sales (Rs Crore) 2037.4 2093.0 2435.7 2827.1

Net Profit (Rs crore) 632.7 193.5 379.4 484.2

Shares in issue (Crore) 24.9 25.1 26.9 26.9

Consolidated EPS (Rs) 25.4 7.7 14.1 18.0

% Growth -1.5 -69.9 84.6 27.6

PE (x) 9.4 31.4 17.0 13.3

Price / Book (x) 3.9 3.8 2.7 2.7

EV/EBITDA (x) 8.5 18.6 11.6 9.2

RoE (%) 41.7 19.4 16.1 20.2

RoCE (%) 34.2 16.4 17.3 21.1 Source: Company, ICICIdirect.com Research

Analysts Name

Raghvendra [email protected] [email protected]

Sales & EPS trend

1271

2037 20932436

2827

0

1000

2000

3000

FY07 FY08 FY09 FY10E FY11E

0

7

14

21

28

Sales, Rs Cr (LHS) EPS, Rs (RHS)

Stock Metrics

Reuters/Bloomberg Code GLEN.BO / GNP@IN

Market Cap. (Rsbn) 6446.3Shares Outstanding (Cr) 26.9

52-week High/Low (Rs) 526/119

Comparative return metrics

3M 6M 12M

Glenmark Pharma 12.1 50.3 -52.3

Cipla 14.2 27.9 22.5

Dr Reddy 25.4 104.5 94.1

Piramal Heathcare 19.2 96.4 15.1

Sun Pharma 24.4 30.6 -5.3

Price Trend

0

100

200

300

400

500

600

700

Aug-08 Nov-08 Mar-09 Jun-09 Oct-09

Target Price

October 12, 2009 | Pharmaceuticals

Initiating Coverage

Glenmark Pharmaceuticals (GLEPHA)

Down but not outGlenmark Pharma (GPL) is one of the best twin plays in the Indian pharmaspace. Monetisation of the discovery pipeline has been one of the keydrivers of valuation in the past but lack of visibility on it has keptvaluations under pressure. We believe current valuations only discountthe generics business, as things are getting better on the base businessfront. On the DDR front, GPL has a robust discovery pipeline,monetisation of which may fetch significant upsides. We initiate coverageon GPL with an OUTPERFORMER rating and a target price of Rs 288.

Specialty business appears major growth driver while India holds the key

The specialty business will likely lead GPLs base business growth inthe short-term with India remaining the key to specialty business

growth. We estimate the specialty business (ex-India) will grow at~17% while India will grow at ~18% CAGR over FY09-11E.

Things appear to be getting better now

Given the smart specialty business QoQ growth in Q1FY10, we believethe worst is behind us and visibility is getting better. Better creditconditions and stable currencies are driving the performance.

Speedy approval holds the key in US markets

Speedy approval of key ANDAs will likely be the mainstay for USrevenue growth. GPL has a robust pipeline of 45 ANDAs pendingapproval, most of which are for differentiated and controlled

substances that generate better margins and have longer lifecycles. Out-licensing from strong discovery R&D pipeline cannot be ruled out

GPL earned ~$110 mn (highest among peers) from discovery R&D tilldate and has a strong pipeline of 13 molecules, 8 of which are inclinics. Given such a strong pipeline, licensing deals cant be ruled out.

ValuationsWe believe lower visibility on R&D income kept GPL under pressure. Webelieve although the global appetite for drug-compound licensing is stillow, given GPLs strong R&D pipeline, monetisation of its key drug-compound cannot be ruled out. On the base business, things are gettingbetter. At 13.3x FY11E EPS, the current valuation discounts the genericsbusiness only, which is at a discount to its peers even after considering

GPLs high leverage. We remain confident on GPLs DDR capability andnitiate coverage with an OUTPERFORMER rating. We value GPL at Rs 288,16x FY11E EPS. We have not attributed any value to the DDR pipeline.

Current PriceRs 240

Target PriceRs 288

Potential upside20%

Time Frame12-15 months

OUTPERFORMER


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GPL signed a landmark US$190- million deal with Forest Laboratories and US$53 millionwith Teijin Pharma to develop andmarket Oglemilast in 2004

Glenmarks speciality business includes India and other emerging markets. The generic business includes US, Western Europe andthe companys oncology businessin Argentina

Company Background

Glenmark Pharmaceuticals Ltd (GPL) is a research-driven, global, fullyintegrated pharmaceutical company. GPL almost has a leadership position inthe Indian drug discovery space (both NCEs and biologics).GPL has a presence in over 85 countries across the world including India,Europe, Brazil, Latin America (excluding Argentina), Russia/CIS, Africa andAsia through branded generic formulations. In regulated markets such as US,Europe, Argentina, etc it has a presence via its non-branded generics. GPLsformulation business is diversified over several therapeutic segments such asdermatology, internal medicine, respiratory, diabetes, paediatrics,gynaecology, ENT and oncology. Its manufacturing plants are located inBaddi (India), Nashik (India), Sao Paolo (Brazil) and Vysoke Myto (CzechRepublic). In India, GPL markets over 100 molecules and combinations invarious therapy areas such as dermatology, respiratory, gynaecology, painmanagement, diabetes, cardio-vascular, internal medicine, etc.

The evolutionGPL was incorporated in 1977. The company came out with its public issue inDecember 1999 to set up a manufacturing facility at Goa and set up the R&Dcentre at Mumbai by providing funds to GM Pharma, GPLs wholly-ownedsubsidiary.GPL had successfully entered the API business in FY02. In CY03, the companyacquired the bulk drugs manufacturing plant from GSK Pharma atAnkleshwar. Simultaneously, it sold its Verna Plant at Goa along with theshares of Glenmark Laboratories. GPL installed the bulk drug facility for thefirst time in FY04 with an installed capacity of 60,000 kg.

the transformation

GPL signed a landmark US$190-million deal with Forest Laboratories in 2004to develop and market Oglemilast, its lead molecule for asthma/COPD, for theNorth American region. During the same year, it signed another deal worthUS$53 million with Teijin Pharma Ltd to develop and market Oglemilast forthe Japanese territory.During FY05, GPL incorporated Glenmark Pharmaceuticals SA, a wholly-owned subsidiary in Switzerland to help manage NCE clinical trials as well asbuild research skills that complement R&D activities in India. During FY05itself, it acquired an API manufacturing unit in Ankleshwar, Gujarat.In March 2005, GPL entered into a collaboration agreement with ShasunChemicals for joint development, filing and marketing of 12 generic productsfor the US market. During 2005 itself, GPL made a deal with Napo Pharma fordeveloping and marketing Crofelemer, Napos lead candidate for treatment of

diarrhoea for over 140 countries.In CY06, GPL set up one manufacturing facility at Baddi (HP) to manufacturesolid oral, liquid oral and semi-solids formulations. During 2007, the companyinked a deal with Dyax Corporation for performing funded biologics researchon three of its targets in the areas of inflammation and oncology. In the sameyear, GPL signed a deal worth US$350 million with Eli Lily for developing andmarketing GRC 6211, Glenmark's lead molecule for treatment of painconditions, for North America, Europe and Japan.GPL reorganised its business with effect from April 2008. As a result ofbusiness reorganisation, the company transferred its generics and activepharma ingredient (API) business to Glenmark Generics Ltd (GGL), a 100%subsidiary of GPL. The semi regulated markets (SRM) business including India

and the drug discovery research operations were kept under GPL.Glenmark is among the few Indian pharmaceutical players targeting new drugdiscovery research. Currently, Glenmark has a pipeline of 13 molecules.

Shareholding pattern (Q1FY10)

Shareholder % holding

Promoters 52.1

Institutional Investors 28.2

Mutual Fund 1.2

Others 18.5

Promoter & Institutional holding trend (%)

52.1 52.1 52.1 52.1

28.229.731.931.4

0

20

40

60

Q2FY09 Q3FY09 Q4FY09 Q1FY10

Promoters Institutional Holding


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Seven of them are in the clinical development stage while the rest are invarious stages of preclinical development. GPL aims to provide a spectrum ofmedicines to people across the globe, ranging from high value, specialtyproducts to low-cost generics. It wants to be counted among the globalleaders and innovators of the pharmaceutical industry. Going forward,Glenmark aims to be a global specialty company with the launch of at least

two proprietary molecules through a product pipeline developed by its ownresearch and in-licensing/buyouts of NCEs or NBEs. The company wants to beat the forefront of pharma innovation. Glenmark has three API facilities, eightfinished dosage facilities and three R&D facilities.

Recent setbacksIn spite of Glenmark having the best NCE pipeline among its Indian peers;recent setbacks on its key molecules have caused a dent in its NCE efforts.Glenmark suffered its first setback when Merck KGa decided to discontinue itsinvestment in diabetes therapy and handed back Melogliptin (for Type-IIdiabetes) to Glenmark, after making an upfront payment of 25 million. Thenext blow came from Eli Lilly in October FY08, when the deal on GRC 6211(for osteoarthritis pain) was terminated, after certain adverse findings. Therecent failure of Oglemilast, led to the dampening of sentiments for Glenmark.

Glenmark had out-licensed Oglemilast, its lead molecule for asthma & COPD,to Forest Labs for further studies on the molecule and commercialisation inthe North American markets on successful completion of clinical studies. Thetotal deal size was pegged at US$190 million, out of which Glenmark hadreceived US$30 million as upfront payment while the rest was to come onachievement of milestones. Recently, Forest Labs announced that themolecule has failed for the COPD indication in phase IIB clinical studies. Thisnegative development is a concern for Glenmark. Forest continues to work onthe Phase IIB trials for asthma indication and clinical data is expected inQ4FY10. We feel the failure of the molecule for COPD indication representing

larger market (an unmet medical need) may trigger revisiting the deal in thelight of positive news flow on asthma indication. In addition, Glenmark hasanother PDE IV inhibitor (Revamilast) for COPD indications, which may keepthe Oglemilast deal alive. Revamilast (GRC 4039) is in the phase I of clinicaltrials.

Exhibit 1:Recent setback on Glenmarks R&D effortsMolecules Licensed to Indication Target Market Comments

Oglemilast Forest Labs Anti-asthma North America Deal Suspended

Oglemilast Tejin Pharma Japan PII b studies in progress

Melogliptin Merck Type-2 Diabetes North America, Europe & Japan Handed back the molecule

GRC 6211 Eli Lilly Osteoarthritis & Pain North America, Europe & Japan Deal Suspended

Source: Company, ICICIdirect.com Research

Recent Setbacks:

1)Melogliptin: returned by Merck

2) GRC6211: Deal suspended by EliLilly

3) Oglemilast: P-IIb data for COPDdid not show any statistical benefits, molecule returned byForest Labs


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Exhibit 2:Glenmark Pharma business break-upGLENMARK PHARMA

(FY09)

Rev: Rs 2093 cr

GENERIC BUSINESS

Rev: Rs 1107 cr

Contribution: 53%

SPECIALITY BUSINESS

Rev: Rs 1107 cr

Contribution: 53%

LaTAM (Brazil & Others)

Rev: Rs 158 cr

Contribution: 14%

Semi-Reg Markets

Rev: Rs 236 cr

Contribution: 21%

Europe

Rev: Rs 100 cr

Contribution: 9%

India

Rev: Rs 614 cr

Contribution: 55%

U.S.

Rev: Rs 734 cr

Contribution: 74%

LaTAM (Argentina)

Rev: Rs 40 cr

Contribution: 4%

Europe

Rev: Rs 14 cr

Contribution: 1%

API/ Bulk Business

Rev: Rs 197 cr

Contribution: 20%

LaTAM: Latin America



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GPL boasts of being one of the highest R&D income earners(~US$110 million) via licensingof new chemical entity (NCE).

We expect the company to logtop line growth at over 16%CAGR and bottom line at ~25%respectively, over FY09-11E.

Investment rationale

GPL has been one of the best performers in the Indian pharma space during

the last five years, clocking a growth of ~19% CAGR in the domestic market

and ~387% in the US generics market. Going forward, we estimate the

consolidated revenue of Glenmark will grow at a CAGR of ~16% over FY09-11E and bottomline would grow at a CAGR of ~25% over this period. Even

though we expect all-round growth, revenues from emerging markets

would be the primary growth driver. On the licensing income front, which

has been a principal value driver during the past few years, lack of

management guidance and a lumpy nature of such income do not provide a

clear picture on timelines and quantum of such income.

An eye on GPLs robust pipeline of NCE and history of being one of the

highest R&D income earners (~US$110 million) via licensing of new

chemical entity (NCE), licensing deal cannot be ruled out. Earlier, Glenmark

had divided the entire business into two parts specialty business

remaining with GPL and generics business with GGL since both thebusiness segments achieved critical mass. Now, Glenmark may list GGL as

it has filed a draft red herring prospectus with Sebi indicating the IPO of

GGL may come in a few months.

Specialty business EMs appear major growth driverWe believe the specialty business would continue to remain the significant

business contributor to GPLs overall revenue, accounting for over 56% of

overall revenues. We estimate the specialty business revenue will grow at a

CAGR of ~18% over FY09-11E to Rs 1534 crore. In the specialty segment,

Indian market revenues are likely to grow at a CAGR of over 18% while other

emerging markets* (excluding India) are likely to grow at a CAGR of ~17%over FY09-11E.

Exhibit 3:GPLs specialty business revenue distribution (excluding licensing income)

5%

11%

16%

20%

14%

13%

13%

29%

19%

24%

21%

21%

22%

21%

4%

9%

10%

10%

67%

69%

60%

55%

55%

55%

56%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

FY05

FY06

FY07

FY08

FY09

FY10E

FY11E

LATAM RoW Europe India



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...while India will likely lead the packWe estimate the Indian market revenue will grow at 18% CAGR over FY09-

11E to Rs 856 crore, contributing ~56% to the speciality business revenues.

Latin America, European specialty business and Rest-of-the-World markets

will likely contribute the remaining 44% of the specialty business revenue. We

believe Emerging Market (geographies in the specialty business) will likely

lead Glenmarks base business growth over the short to medium term.

Exhibit 5: YoY growth in India & Emerging Markets (excluding India) (Rs Crore)70%

48%

28% 14%21%

16%18% 18%

14%21%14%

14%

0

200

400

600

800

FY06 FY07 FY08 FY09 FY10E FY11E

0%

15%

30%

45%

60%

75%

India EM (ex-India) India YoY Gr. % EM YoY Gr. %

Rs

Crore


Exhibit 4:Revenue contribution from India to specialty business remains high at ~56%

301.8 385.1 438.5530.8 614.2 725.8 856.4151.3

172.0293.0

433.2493.1

596.1677.7

0

400

800

1200

1600

2000

FY05 FY06 FY07 FY08 FY09 FY10E FY11E

India GPL (excl. India)

Sales(RsCrore)



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Domestic market will likely leverage on its therapy area distributionWe believe GPL will leverage from its market penetration and therapy

exposure in the domestic market. GPL generates ~23% revenue from the

chronic segment, which is growing faster. In addition, GPL has significant

exposure (~30% of domestic formulation revenue) to the dermatology

segment, which is growing in excess of ~20% while the cardiovascular

segment accounts for ~14% and is growing at ~20%.

We further believe the strong field force of ~2000 people spread across 11

divisions will help derive domestic formulation growth. GPL is one of the

fastest growing companies in India with a focus across eight therapy areas

and leadership in dermatology.

Exhibit 6:Therapeutic break-up in domestic market (%)2001 2002 2003 2004 2005 2006 2007 2008

Dermatologicals 37 36 35 34 33 32 29 28

Anti-infectives 11 12 12 11 11 14 17 17

Respiratory 22 21 18 18 15 17 16 15

Anti-Diabetics 0 4 7 7 8 9 9 8

Pain Management 4 3 7 10 13 7 7 6

Cardiovascular 0 0 0 3 5 5 7 10

Gynaecologicals 9 7 6 6 5 5 5 5

Gastro-intestinal 10 11 11 8 7 3 4 4

Others 7 6 4 3 3 8 6 7


Worst seems to be over, things appear better in various EMsWe believe all the geographies in Emerging Markets are performing well.

This will enable Emerging Markets to be the lead drivers of GPLs basebusiness. We have clubbed India, CIS, RoW, LatAm and the European

specialty business under Emerging Markets. We believe an improvement in

credit quality and stable currency are the main levers of robust performance

of GPL in CIS countries in Q1FY10. Fair improvement in global economic

conditions has made the business environment robust in EMs. GPL resorted

to a tight control over its working capital in a few of its emerging markets

due to worsening credit quality and currency fluctuations, which impacted

its growth in that region. Now, with improvement in the business

environment, things are likely to improve. We believe GPL will consolidate

its position in emerging markets. Given this consolidation, focus on limited

number of markets, the stability in currency and improving credit quality willlikely result in a better performance.

GPL has significant (~30% of

domestic formulation revenue)

exposure to dermatology therapy

area, growing in excess of ~20%while the cardiovascular segment

accounts for ~14% and is growing

at ~20%

We believe an improvement incredit quality and stable currencywere the main levers of robust performance of GPL in CIScountries in Q1FY10


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Glenmark Generics (GGL) banking on quality filings

We expect GGLs revenues will likely post a CAGR of 14.5% over FY09-11Eon account of growth of ~14% CAGR in US revenues and 44.7% CAGR inEuropean revenues. Growth of GGL depends upon its filing in regulatedmarkets. The company is focused on filing niche generics in these marketsto manage the excellent growth.

US revenue to growth at ~14% CAGRWe expect the US fixed dosage revenue of GGL to grow at a CAGR of ~14%over FY09-11E to Rs 950 crore on account of quality filings under the nichesegment. Glenmarks fixed dosage US revenue grew at ~386% over FY05-09to Rs 734 crore. Currently, the company has 46 generic products authorised for distribution in the US market and 45 products in various stages ofapproval.

Exhibit 7:US market revenues to grow at 14% CAGR (FY09-11E)

220.7

564.0

733.8814.7

950.3

1.357.2

0

300

600

900

1200


GGL - US Revenues


Quality filing for US market to drive US revenuesSpeedy approval of key ANDAs will likely be the mainstay for US revenuegrowth. GPL has a robust pipeline of 45 ANDAs pending approval, most ofwhich are for differentiated and controlled substances that generate bettermargin and have a longer lifecycle. During the last two quarters, the numberof approvals by USFDA suggests the pace of approval has increased.

Exhibit 8:Performance in the US market during last 5 quarters (Rs crore)US Revenues YoY % QoQ % Pdt launched Pdt approved Cumm ANDA's

Q1FY09 190.9 131.0 -2.7 2 4 35

Q2FY09 176.1 117.3 -7.7 0 1 40

Q3FY09 210.4 3.1 19.5 2 1 40

Q4FY09 156.4 -20.3 -25.7 6 5 40

Q1FY10 172.1 -9.9 10.0 2 *5 45

* including two tentative approvals


GPL has adopted a differentiated strategy for the US fixed dosage market,

wherein it, now, focuses on products, which can generate higher margins andhave a longer life cycle. The company has started filing for ANDAs in nichesegments such as in Para IVs, controlled release, dermatology, hormones,

We expect US fixed dosage revenues to grow at a CAGR of~14% over FY09-11E to Rs 950crore on account of quality filingsunder the niche segment.Currently, the company has 46 generic products authorised fordistribution in the US market.Another 45 products are in variousstages of approval

GPL has adopted a differentiated strategy for the US fixed dosagemarket, wherein it now focuses on products, which can generate higher margins and have a longer life cycle. Currently, such productsconstitute ~50% of its US productportfolio. We expect this to go up to~75% on account of the companys increased focus on developing niche ANDAs (such as Para IV,

controlled substances,dermatology, hormones andoncology)


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oncology and controlled substance. These have higher margin andcomparatively longer life cycles.

Exhibit 9:% ANDA FilingsFY08 FY09 Total US Maket ($ bn)

Dermatology 16 22 4

Controlled substances 7 11 12

Modified Release 10 26 22

Hormones 5 11 5

Oncology 0 11 NA

FTF 10 8 NA

Immediate Release 52 11 NA

Total % 100 100 NA

Total ANDA's Filed 30 45 NA


The competitive position of GPL in the niche generic market is quiteinteresting. We believe the company would be able to generate handsome

revenue growth from the filings once the USFDA speeds up its ANDAapproval process.

Exhibit 10:Competitive positioning of niche ANDAsMarket size

(US$, Bn)

Entry

barrierMargins Competitors Partnership Filings

Partnership with Paul Capital for

development of 16 dermatology

Controlled Substance 12 High High Mallinckrodt, Watson, Endo 4

Modified Release 22 High High 6

Hormones 5 High High Barr & Watson 2

Oncology 10 High High Teva Sicor, Ben-Venue & Barr -

High Fougera, Perrigo, Taro 10Dermatology 4 High


Glenmark has first-to-file (FTF) status on five ANDAs {for Zetia (ezetimibe),Strattera (atomoxetine), Tarka (Trandopril) and Crestor (Rosuvastatin)}.

Exhibit 11:ANDA filings under Para IV certificationOngoing litigation (FTF)

Product Brand Name Innovator IMS Sales Indication

Ezetimibe Zetia Schering Plough 1.8 bn $ High BP & Cholesterol

Rosuvastatin Ca Crestor --- 1.7 bn $ High LDL cholesterol & fat accumulation

Trandalopril/Verapamil Tarka Abbott 95 mn $ Hypertension

Flucinonide Vanos Medicis 329 mn $ Psoriasis/ Atopic dermatitis

Fluticasone Lotion Cutivate Nycomed 33 mn $ Atopic dermatitis



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Drug discovery a major business of GPLGlenmark differentiates itself from most of its peers by virtue of its strong

focus on drug discovery research (DDR). Having generated licensing income

of ~US$110 million, Glenmark boasts of a strong discovery pipeline of 13

molecules, eight NCEs and five new biological entities (NBEs). GPL foresees

entering into a licensing deal on few of the DDR pipeline. However, it hasnot guided for any licensing income in the years to come post the recent

setback on a few existing deals. However, given GPLs DDR focus on unmet

medical needs, we believe the company will be able to successfully out-

license at least one molecule in FY10.

Strong discovery pipeline a goldmine for futureGPLs DDR has achieved a high level of success in a comparatively short

period by garnering ~US$110 million licensing income on three molecules.

We believe such an excellent performance was on account of (I) high level of

commitment of the top management on drug discovery and, (II) focus on

validated and known targets that have large target markets and significantlevel of interest from big innovator companies. Currently, the company boasts

of 13 molecules in the research pipeline, two molecules in phase III clinical

trials, two in clinical trial phase II and three in phase I. The rest are in the

preclinical stage. Out of the pipeline, two molecules have the potential to be

first in class for launch. Glenmark seems to be well positioned to fulfil its

Vision 2015, wherein it plans to launch two proprietary drugs and build a late-

stage pipeline.

However, on the flip side, Glenmark suffered heavy blows in its R&D efforts in

the recent past. It all started with Merck KGa, giving back Melogliptin to

Glenmark followed by Eli Lilly suspending the deal for GRC 6211 and the

recent failure of Oglemilasts P-II b studies for COPD. This had led todampening of sentiments for Glenmark Pharma both stock-wise and from a

business point of view. The company is now pinning its hope on Oglemilast

for asthma (Forest is conducting P-II studies), Melogliptin (which is scheduled

to enter P-III in Q4FY10) and the Chrofelemer opportunity.

Exhibit 12:Glenmarks out-licensing dealsYear Molecules Licensed to Value Indication Target Market Upfront Payment

(US $ mn) ( $ mn )

2004 Sep Oglemilast Forest Labs 190 Anti-asthma North America 53

2005 Dec Tejin Pharma 53 Japan 7

2006 Melogl iptin Merck 190 Type-2 Diabetes North America, Europe & Japan Euro 25 mn

2007 Oct GRC 6211 Eli Lil ly 350 Osteoarthritis & Pain North America, Europe & Japan 45


GPL has been one of the bestperformers in Indian pharma in the DDR space and is one of the

highest R&D income earners(~US$110 million) via licensing ofNCEs


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Exhibit 13: Strong discovery pipelineInvestigation phases

Clinical TrialIndication Preclinical Phase I Phase II Phase III

GRC 3886(Oglemilast)

Asthma, COPD

GRC 6211 Osteoarthritis, NeuropathicPain, Dental Pain,

Incontinence

GRC 8200(Melogliptin)

Diabetes (Type II)

GRC 4039 Rheumatoid Arthritis,Inflammation, MultipleSclerosis

GRC 10693 Neuropathic Pain,Osteoarthritis and otherInflammatory Pain

GBR 500 Acute Multiple Sclerosis,Inflammatory Disorders

GRC 9332 Obesity, Dyslipidemia,Metabolic Disorders

GBR 600 Acute Stroke/ CoronarySyndrome, ThrombosisCardiovascular Disorders

Source: Company, ICICIdirect Research

Key near-term trigger for the stock

Chrofelemer launch

GPL in-licensed Crofelemer, a drug for HIV associated diarrhoea, from NapoPharma of US. The molecule continues to progress well in Phase III clinicaltrials. Glenmark expects to launch the product by early FY11 in Rest of theWorld markets (excluding North America, Europe, China and Japan). Thecompany expects to generate peak sales of US$80 million. GPL will have topay royalty to Napo on sales but may get an opportunity to supply API forwestern markets.

Further clinical development suspended


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Exhibit 14: Rich R&D pipeline; licensing deal cannot be ruled out

Compound Target

Target

launch Current status Comments

Crofelemer HIV associated diarrhea 2010 Conducting Phase III trials

GPL licensed Crofelemer from Napo for

markets other than North America, Europe,

China, Japan, etc and expects to generate

peak sales of US$80 million. GPL will have topay royalty to Napo on Crofelemer sales

GRC 3886

(Oglemilast)

PDE IV Inhibitor (for

Asthma, COPD) 2012

Phase IIB studies for Asthma is

ongoing

Forest announced that Oglemilast has not

fetched positive results in Phase IIB trial

for COPD. Clinical trials for asthma are

ongoing and the data on it is expected in

Q4FY10. Negative data on asthma will

have significant impact on Glenmark

GRC 8200

(Melogliptin)

DPP IV Inhibitor (for

Diabetes Mellitus (Type II )) 2012

Phase IIB studies on the compound

are completed and is to enter the

Phase III. IND on the compound is

approved

Melogliptin is one of the candidates for out-

licensing. Phase III trials on it are likely to

start by the end of FY10

GRC 6211

TRPV1 Antagonist (for

Osteoarthritic Pain,

Neuropathic Pain, Urinary

Incontinence) Discontinued

GRC 4039

(Revamilast)

PDE IV Inhibitor (for

Rheumatoid Arthritis &

other Inflammatory

disorders, Multiple

Sclerosis) 2013 Phase I completed

Phase II studies on Revamilast are likely

to start. Revamilast can be utilised to

save the future licensing income from

Forest as it is also a PDE IV inhibitor as

Oglemilast was

GRC 10693

CB2 Agonist (for

Neuropathic Pain,

Osteoarthritis & other

inflammatory pain) 2014 Finished Phase I trials

Phase IIB clinical trials on the molecule are

to be started

GBR 500

VLA2 Antagonist (for

Multiple Sclerosis,Inflammatory Disorders) 2013 To enter Phase I shortly

GRC 15300

TRPV3 Antagonist (for

Osteoarthritic pain,

Neuropathic Pain, Dental

Pain) 2014 To enter Phase I in UK

Regulatory approval has been received for

clinical studies, which is likely to be started

now

GBR 600 2014 Pre-clinical



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Exhibit 15: Assumptions for revenue model (Rs Crore)

FY05 FY06 FY07 FY'08 FY09 FY10E FY11E

USA 1.3 57.2 220.7 564.0 733.8 814.7 950.3

Growth (%, YoY) 4269.6 285.6 155.5 30.1 11.0 16.6

% revenue contribution to GGL 1.5 31.0 58.0 71.2 74.4 73.1 73.5

Europe 0 0 0 0.9 14.7 20.4 30.7Growth (%, YoY) 1497.2 38.8 50.7

% revenue contribution to GGL 0.1 1.5 1.8 2.4

Latin America (Argentina) 0 14.0 27.9 30.9 40.0 52.9 63.5

Growth (%, YoY) 99.4 10.5 29.8 32.2 20.0

% revenue contribution to GGL 7.6 7.3 3.9 4.1 4.8 4.9

API 84.6 113.3 131.8 195.9 197.2 225.8 248.3

Growth (%, YoY) 33.9 16.4 48.6 0.7 14.5 10.0

% revenue contribution to GGL 98.5 61.4 34.6 24.7 20.0 20.3 19.2

Glenmark Generics (GGL) - Total 85.9 184.5 380.5 791.7 985.7 1113.8 1292.9

% revenue contribution to total sales 14.3 24.0 30.4 39.7 47.1 45.7 45.7

SPECIALTY BUSINESS

Latin America (Brazil & Others) 21.5 63.4 115.9 191.8 158.0 176.5 203.0

Growth (%, YoY) 0.0 195.5 82.9 65.4 -17.6 11.7 15.0

% revenue contribution to GPL 4.2 10.9 13.3 15.9 14.3 13.4 13.2

Rest of the World [RoW] 129.9 108.6 177.1 204.6 235.5 288.0 316.8

Growth (%, YoY) 0.0 -16.4 63.0 15.5 15.1 22.3 10.0


Europe 0.0 0.0 0.0 36.9 99.6 131.6 157.9

Growth (%, YoY) 169.9 32.1 20.0% revenue contribution to GPL 3.1 9.0 10.0 10.3

India 301.8 385.1 438.5 530.8 614.2 725.8 856.4

Growth (%, YoY) 0.0 27.6 13.9 21.0 15.7 18.2 18.0


Out-licensing Revenues 62.7 26.1 139.5 240.3 0.0 0.0 0.0

Growth (%, YoY) -58.3 434.3 72.2 NA NA NA

515.8

Specialty business (GPL) Total 515.8 583.3 871.0 1204.2 1107.3 1321.9 1534.2

Growth (%, YoY) 13.1 49.3 38.3 -8.1 19.4 16.1

% revenue contribution to total sales 85.7 76.0 69.6 60.3 52.9 54.3 54.3

Total - Glenmark (Consolidated) 601.7 767.8 1251.5 1996.0 2093.0 2435.7 2827.1

* Revenues for FY08 are reported numbers



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Risks & concerns

1. While Glenmark is receiving approvals for products where the

competition is high, approvals in focused areas of controlled

releases/modified releases and hormones space are being delayed.This is likely to impact revenue growth and margin expansion for the

company

2. After achieving critical mass in the US generics business, the

company has started focusing on filing ANDAs under niche segments

such as under Para IV, controlled substances, dermatology, etc. Filing

of ANDAs under Para IV may trigger litigation with innovators, leading

to cash outgo in the form of legal expenses

3. The company has so far out-licensed three molecules (NCEs) in return

for a certain out-licensing fee. A part of the fee is received as upfront

payment, while further payments are based on a milestone themolecule crosses. Failure of licensed molecules at a later phase may

lead to a non-payment of milestone. This may impact investor

sentiments considerably and may exert a further pressure on R&D

expenditure

4. High leverage and higher working capital requirement has been a

cause of worry for Glenmark Pharma. Glenmarks current working

capital cycle is 190 days long. We believe this is the highest among its

Indian peers. With current debt at ~Rs 2100 crore, the debt-equity is

above 1. Although the management has guided for debt repayment

from the recent issue of QIP, we believe this may be beneficial only if

the entire money raised is used for debt repayment.


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Financials

We expect the consolidated revenue and profits of Glenmark to grow at a

CAGR of ~16% and 25% respectively, over FY09-11E. Even though we

expect all-round growth, revenues from India and the US generics market

would be the primary growth driver. GGLs revenue is likely to clock atopline growth of 14.5% CAGR over FY09-11E while the speciality business

is likely to see growth of ~18% CAGR over this period. We believe GGLs

topline growth would come primarily on the back of US generics revenue on

account of filings under niche therapy areas. Although we are confident that

Glenmark would continue generating out-licensing revenues by monetising

its NCE pipeline, we have not factored these upsides into our forward

estimates.

Consolidated revenue growth momentum to sustainConsolidated revenues are estimated to grow at a CAGR of ~16% over FY09-

11E to Rs 2827 crore. We expect the speciality business to deliver a robust

performance on account of sturdy all-round growth, with India leading thepack. USFDA is speeding up the approval process, which may eventually lead

to higher than anticipated growth from the US market. We expect US

revenues to grow at a CAGR of ~14% in FY09-11E.

Exhibit 16: Consolidated revenues to grow at 16% FY09-11E CAGR (Rs crore)

85.9 184.5380.5

791.7 985.71113.8 1292.9

515.8583.3

871.0

1204.21107.3 1321.9

1534.2

62.726.1

139.5

240.3

0

500

1000

1500

2000

2500

3000


GGL GPL(excl. R&D income) R&D income

Sales

RsCrore


We expect the consolidatedrevenue and profits of Glenmark togrow at a CAGR of ~16% and 25%

respectively, over FY09-11E, on account of Glenmarks speciality business growing at 18% CAGRand the generic business at 14.5%CAGR


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Margins set to improve over FY09-11EIn spite of a rise in R&D expenditure, the EBITDA margins are expected to

improve by 244 bps over FY09-11E to ~30% on account of ~16% CAGR

growth in top-line over the same period. The company clocked an EBITDA

margin of 27% during FY09, a decline of ~13% YoY as there was price

erosion in Oxcarbazepine (Trileptal), which was launched under para IV

certification in the US market in the previous year. Products launched with

exclusivity under para IV generated handsome revenues and margins for the

company.

Exhibit 17: Margin to witness good growth during FY09-11E

27.8%

21.6%

34.4%

27.5%30.1%

18.8%

12.9%16.5%

24.2%

14.8% 15.6%17.1%

29.9%

40.7%

0%

10%

20%

30%

40%


EBITDA margin Adj NPM


Adjusted net profit to grow at CAGR of ~25% over FY09-11E

We expect the net profit margin to expand by 230 bps to ~17.1% duringFY09-11E. The company has recently raised US$85 million through QIP at Rs

221 per share and has guided to repay the debt, which will reduce the interest

cost, going ahead. Higher depreciation cost (due to recent capex) and higher

tax charges in the range of 23% (as some of the plants are losing EOU status)

will prevent further margin expansion. According to our estimates, net profit

of the company will grow at a CAGR of ~25% to Rs 484 crore in FY09-11E.

Exhibit 18: Net profit likely to grow at a CAGR of ~25% over FY09-11E

107.1 191.788.0 310.1 632.7

379.4 484.2

18.8%

12.9%

16.5%

24.2%

14.8%

17.1%

15.6%

0

200

400

600

800


0%

10%

20%

30%

Net Profit NPM (%)

NetPrrofit(RsCr)

NPM(

%)

* FY09 net profit margin is on adjusted basis


The EBITDA margin is expectedto improve by 244 bps to ~30%in FY09-11E

We expect the reported net profit margin to expand to~17.1% during FY09-11E. Higher depreciation cost andtax charges will prevent furtherexpansion in net profit


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Return ratios likely to improve, going aheadWe believe the return ratios would hover around ~20-21%, going ahead.

Higher depreciation, tax charges and dilution due to QIP will keep pressure on

return on net worth (RoNW). The RoNW is likely drop to ~16% in FY10E due

to dilution and lower PAT growth over FY09-10E. With higher growth in PAT

over FY10E-11E, the RoNW will likely recover to ~20%. The RoCE is likely to

improve by 473 bps from ~16.4% in FY09 to ~21.1% in FY11E but will remain

suppressed during FY10E at ~17%.

Exhibit 19: Return ratios to stabilise at 20-21% levels

32.6%

22.4%

45.2%41.7%

19.4%16.1%

20.2%

18.4%12.2%

27.1%

34.2%

16.4% 17.3%

21.1%

0%

10%

20%

30%

40%

50%


RONW (%) ROCE (%)


Recent QIP EPS accretive transactionRecently, the company raised US$85 million through qualified institutional

placement (QIP) at a price of Rs 221 per share. We believe the company

would utilise the proceeds of the QIP to retire debts on the book. In Q3FY09,

the company had raised funds at higher rates (~16%). Hence, retiring debt

from this QIP issue would be EPS accretive as the interest cost would come

down.

Exhibit 20: Impact of QIPAbsolute Change (w - wo)

FY10E FY11E FY10E FY11E FY11E

Net Profit 379.4 484.2 287.9 377.5 106.7

EPS 14.1 18.0 11.5 15.1 3.0

PE 17.0 13.3 19.0 14.5 -1.2

Cash 524.9 145.8 442.6 365.1 -219.3

EV/ EBITDA 11.6 9.2 12.5 9.3 -0.1

NPM % 14.8 16.8 11.6 13.5 3.2

RoNW % 16.1 20.2 15.4 17.0 3.2

RoCE % 17.3 21.1 15.3 17.1 4.0

With QIP W/o QIP


Higher depreciation, taxcharges and dilution due to QIPwill keep pressure on return on net worth while RoCE is likelyto improve by 473 bps overFY09-11E

Recently, the company raisedUS$85 million through QIP, theproceeds of which will be usedin retiring debt


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Valuations

Glenmark has been one of the best performers in the Indian pharma space

during the last few years. The company boasts of being one of the highest

R&D income earners (US$110 million) via out-licensing of new chemical entity

(NCE). Glenmark differentiates itself by logging commendable growth at a

CAGR of over 386% during FY05-09 to Rs 734 crore from US markets.

We expect the consolidated topline of Glenmark to grow at a CAGR of ~16%

over FY09-11E while the bottomline will grow at a CAGR of ~25% over this

period. Revenue from fixed dosage branded generics from the specialty

business will likely be the primary growth driver. GGLs revenue is likely to

clock 14.5% topline growth CAGR over FY09-11E while GPL (specialty

business) is likely to see ~18% growth CAGR over the same period. We

believe GGLs topline growth would come primarily on the back of US

generics revenue on account of filings under niche generics. An eye on GPLs

robust pipeline of NCE and history of being one of the highest R&D income

earners (~US$110 million) via licensing of new chemical entity (NCE),

licensing deal cannot be ruled out. A meaningful out-licensing deal andpositive news flow for lead molecules are critical for sentiments to improve

and would lead to a re-rating of the stock.

Going ahead, Glenmark would focus on generating cash by strengthening itsworking capital cycle in emerging markets (excluding India). The companywould be consolidating its position in EMs. We believe lower visibility on R&Dincome kept GPL under pressure, recently. However, we believe the globalappetite for drug-compound licensing is still low. Given GPLs strong R&Dpipeline, monetisation of its key drug-compound cannot be ruled out. On thebase business, things are getting better.

At 13.3x FY11E EPS, the current valuation discounts the generics businessonly, which is at discount to its peers even after considering GPLs highleverage. We remain confident on GPLs DDR capability and initiate coverageon the stock with an OUTPERFORMER rating. We value GPL at Rs 288, 16xFY11E EPS. We have not attributed any value to the DDR pipeline.

P/E BandBetter than expected improvement in return ratios and growth numbers,

would lead to a re-rating of the stock.

Exhibit 21: P/E band

15x

10x

5x

0

100

200

300

400

500

600

700

800

Apr-04 Mar-05 Feb-06 Jan-07 Dec-07 Nov-08 Oct-09

20x


We expect the consolidated toplineof Glenmark to grow at a CAGR of~16% over FY09-11E while the bottom-line to grow at a CAGR of~25% over this period.

A meaningful out-licensing deal

and positive news flow for lead

molecules are critical for sentiments to improve and would

lead to a re-rating of the stock.

Going ahead, Glenmark would focus on generating cash by strengthening its working capitalcycle in emerging markets(excluding India).


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Exhibit 22: Profit & loss account (Rs. Crore)FY08 FY09 FY10E FY11E

Sales 2111.3 2093.0 2435.7 2827.1

Growth (%) 60.3 2.7 16.4 16.1

Op. Expenditure 1234.2 1661.0 1790.3 2023.6

EBITDA 847.8 629.0 770.4 863.5

Growth (%) 91.8 -25.8 22.5 12.1

Other Income 44.6 197.0 125.0 60.0

Depreciation 71.6 102.7 144.0 150.9

EBIT 776.2 526.3 626.4 712.6

Interest 63.2 140.5 133.6 83.7

PBT 713.0 268.9 492.7 628.9

Growth (%) 97.3 -62.3 83.2 27.6

Tax 80.3 75.4 113.3 144.6

Extraordinary Item 0.0 117.0 0.0 0.0

Rep. PAT before MI 632.7 193.5 379.4 484.2

Minority interest (MI) 2.0 3.0 4.0 5.0

Rep. PAT after MI 632.7 193.5 379.4 484.2

Adjustments 2.0 3.0 4.0 5.0

Adj. Net Profit 492.7 310.4 379.4 484.2Growth (%) 134.5 -37.0 22.2 27.6

Exhibit 24: Key ratios (%)FY08 FY09 FY10E FY11E

Raw material 28.1 32.8 31.8 31.8

Emp Exp 2.7 5.0 3.8 3.7

Other mfg exp 3.6 4.0 2.6 2.5

SG&A 22.4 33.4 26.4 25.1

R&D 3.7 4.2 8.8 8.5

Average cost of debt 6.4 6.7 8.3 7.5

Effective Tax rate 11.3 28.0 23.0 23.0

Profitability ratios (%)

EBITDA Margin 40.7 27.5 30.1 29.9

PAT Margin 30.4 8.4 14.8 16.8

Adj. PAT Margin 24.2 14.8 14.8 16.8

Per share data (Rs)

Revenue per share 81.9 83.5 90.7 105.3

EV per share 272.9 320.2 279.3 275.2

Book Value 61.1 63.8 87.8 89.2

Cash per share 6.3 2.9 19.5 5.4

EPS 25.4 7.7 14.1 18.0

Cash EPS 28.3 11.8 19.5 23.6DPS 1.3 0.8 1.4 1.8

Costs as % to sales except tax rate and average co

Exhibit 23: Balance sheet (Rs, Crore)FY08 FY09 FY10E FY11E

Equity Capital 24.9 25.1 26.9 26.9

Preference capital 0.0 0.0 0.0 0.0

Reserves & Surplus 1493.8 1573.1 2330.1 2368.2

Shareholder's Fund 1517.1 1598.2 2357.0 2395.1Minority Interest -1.5 0.0 0.0 0.0

Secured Loans 196.1 382.7 522.0 433.7

Unsecured Loans 794.8 1711.7 1089.3 689.3

Deferred Tax Liability 94.6 60.1 56.9 56.9

Source of Funds 2923.4 4208.9 4649.5 4291.8

Gross Block 1124.1 1838.6 2203.6 2333.6

Less: Acc. Depreciation 205.6 272.3 417.8 568.7

Net Block 918.5 1566.2 1785.8 1764.9

Capital WIP 337.2 545.4 409.1 204.5

Net Fixed Assets 1255.7 2111.7 2194.8 1969.4

Intangible asset 2.0 3.0 4.0 5.0

Investments 18.8 18.1 40.0 40.0

Cash 157.3 71.5 524.9 145.8

Trade Receivables 806.9 955.3 1001.0 1107.6Loans & Advances 286.9 422.1 350.3 406.6

Inventory- Other 400.7 630.2 538.4 622.5

Total Current Asset 1651.8 2079.2 2414.7 2282.4

Current Liab. & Prov. 320.7 456.3 624.4 716.8

Net Current Asset 1331.0 1622.8 1790.3 1565.6

Application of funds 2926.3 4208.9 4649.5 4291.8

Exhibit 25: Key ratios (%)Return ratios FY08 FY09 FY10E FY11E

RoNW 41.7 19.4 16.1 20.2

ROCE 34.2 16.4 17.3 21.1

ROIC 33.0 10.4 18.1 21.3

Financial health ratioOperating CF (Rs Cr) 696.7 240.8 482.3 586.7

FCF (Rs Cr) -163.1 -782.6 715.9 638.9

Cap. Emp. (Rs Cr) 2604.1 3752.6 4025.1 3575.0

Debt to equity (x) 0.7 1.3 0.7 0.5

Debt to cap. emp. (x) 0.4 0.6 0.4 0.3

Interest Coverage (x) 11.3 1.9 3.7 7.5

Debt to EBITDA (x) 1.2 3.3 2.1 1.3

DuPont ratio analysis

PAT/PBT 0.9 0.7 0.8 0.8

PBT/EBIT 0.9 0.7 0.8 0.9

EBIT/Net sales 0.4 0.3 0.3 0.3

Net Sales/ Tot. Asset 0.8 0.6 0.6 0.8

Total Asset/ NW 1.7 2.3 1.7 1.5

Spread of RoIC over WACC

RoIC 33.0 10.4 18.1 21.3

WACC 9.6 11.3 10.9 10.9

EVA (Rs) 492.7 -27.4 205.3 277.7

RoIC-WACC 23.4 -0.9 7.2 10.4


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2 0 | P a g e

Exhibit 26: Cash flow statement (Rs Crore)FY08 FY09 FY10E FY11E

Profit after Tax 632.7 193.5 379.4 484.2

Misc exp w/o 1.5 -1.5 0.0 0.0

Dividend Paid -31.6 -19.3 -37.9 -48.4

Depreciation71.6 102.7 144.0 150.9

Provision for deferred ta 22.6 -34.5 -3.2 0.0

CF before change in WC 696.7 240.8 482.3 586.7

Inc./Dec. in Current Liab. 81.2 135.6 168.1 92.4

Inc./Dec. in Current Ass 494.8 513.2 -117.9 246.9

CF from operations 283.0 -136.7 768.3 432.2

Purchase of Fixed Asset 516.9 958.6 227.2 -74.5

(Inc.)/Dec. in Investment 0.1 -0.7 21.9 0.0

CF from Investing -517.0 -957.9 -249.1 74.5

Inc./(Dec.) in Debt 54.2 1103.4 -483.1 -488.2

Inc./(Dec.) in Net worth 231.2 -94.6 417.3 -397.7

CF from Financing 285.5 1008.8 -65.8 -885.9

Opening Cash balance 105.8 157.3 71.5 524.9

Closing Cash balance 157.3 71.5 524.9 145.8

Exhibit 28: Working capital & FCFWorking Capital FY08 FY09 FY10E FY11E

Working cap./Sales 0.7 0.8 0.7 0.6

Inventory turnover 5.1 3.3 4.5 4.5

Debtor turnover 2.5 2.2 2.4 2.6

Creditor turnover6.4 4.6 3.9 3.9

Current Ratio 5.2 4.6 3.9 3.2

Quick ratio 3.9 10.3 10.6 11.3

Cash to abs. Liab. 0.5 0.2 0.8 0.2

WC (Excl. cash)/sales 0.6 0.7 0.5 0.5

FCF Calculation (Rs Crore)

EBITDA 847.8 629.0 770.4 863.5

Less: Tax 80.3 75.4 113.3 144.6

NOPLAT 767.4 553.6 657.1 718.8

Capex 516.9 958.6 227.2 -74.5

Change in working cap. 413.6 377.6 -286.0 154.5

FCF -163.1 -782.6 715.9 638.9

Exhibit 27: YoY growth (%)FY08 FY09 FY10E FY11E

Net sales 60.3 2.7 16.4 16.1

EBITDA 91.8 -25.8 22.5 12.1

Adj. net profit 134.5 -37.0 22.2 27.6

EPS -1.5 -69.9 84.6 27.6

Cash EPS -3.5 -58.3 64.9 21.3

FCF 86.1 -65.4 100.3 21.6

Net worth 121.3 5.2 47.5 1.6

Exhibit 29: Valuation parametersFY08 FY09 FY10E FY11E

PE (x) 9.4 31.4 17.0 13.3

EV/EBITDA (x) 8.5 18.6 11.6 9.2

EV/Sales (x) 3.3 3.8 3.1 2.6

Dividend Yield (%) 0.5 0.3 0.6 0.8

Price/BV (x) 3.9 3.8 2.7 2.7


21/21

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Glenmark_Initiating Coverage

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